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Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy

Fabio Schiantarelli (), Massimiliano Stacchini () and Philip Strahan ()
Additional contact information
Massimiliano Stacchini: Bank of Italy
Philip Strahan: Boston College and NBER

No 1072, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Exposure to liquidity risk makes banks vulnerable to runs from both depositors and from wholesale, short-term investors. This paper shows empirically that banks are also vulnerable to run-like behaviour from borrowers who delay their loan repayments (default). Firms in Italy defaulted more against banks with high levels of past losses. We control for borrower fundamentals with firm-quarter fixed effects; thus, identification comes from a firm’s choice to default against one bank versus another, depending on their health. This ‘selective’ default increases where legal enforcement is weak. Poor enforcement can therefore create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt.

Keywords: bank lending; financial distress (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Date: 2016-07
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Related works:
Working Paper: Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy (2016) Downloads
Working Paper: Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy (2016) Downloads
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